Finance Minister Jim Flaherty adjusts his tie as he arrives at a news conference to announce tax breaks for Canadian caregivers in Toronto on Thursday, Feb. 23, 2012. (Pawel Dwulit/THE CANADIAN PRESS/Pawel Dwulit/THE CANADIAN PRESS)

Finance Minister Jim Flaherty adjusts his tie as he arrives at a news conference to announce tax breaks for Canadian caregivers in Toronto on Thursday, Feb. 23, 2012.(Pawel Dwulit/THE CANADIAN PRESS/Pawel Dwulit/THE CANADIAN PRESS)

Ottawa is launching a two-track fiscal offensive against the provinces: challenging them to focus on spending cuts and corporate tax breaks while warning it won’t back down on its majority-backed agenda in order to ease the provinces’ financial burdens.

The message was delivered by Prime Minister Stephen Harper Thursday in Iqaluit, where he took the opportunity to shed light on how federal-provincial relations will work now that he has a majority.

Old Age Security

When asked whether he should heed warnings the economy can’t absorb chopping at the federal level while provinces like Ontario begin a period of deep austerity, Mr. Harper said provincial affairs were not his concern.

“We ran on a clear mandate to create jobs and growth, and to do that by making investments while at the same time making sure that our deficit falls and we return to balance. That's the program on which we ran,” he said.

“That approach has been widely supported by analysts both inside the country and around the world, so I think that’s the appropriate course. Obviously, other … governments will have to make their own decisions in their own context.”

Finance Minister Jim Flaherty had a similarly blunt message, telling the provinces to focus on spending cuts – not raising corporate taxes – as both levels of government move this year to tackle the budget deficits created during the recession.

With British Columbia, and possibly Ontario, moving away from a national push to lower taxes on business, Mr. Flaherty made clear Thursday that provinces should keep working to lower business taxes.

Are the provinces’ finances a threat? “I’m concerned,” Mr. Flaherty told The Globe and Mail. “We’re one country and it’s important that all of the provinces move in the right direction towards fiscal responsibility, stability. And I'm encouraging them to do that, because at the end of the day the difficulties in the provinces reflect on the country as a whole.”

If they don’t, he said, there will be consequences. “You get a lack of confidence in the markets, and we’ve already heard from the credit agencies about a couple of Canadian provinces,” Mr. Flaherty said. “The federal government has the highest credit rating in the world; we want everyone to row in the same direction.”

Economic pressures are ratcheting up federal-provincial tensions, but the Harper government has made clear that it will make good on the campaign promises that helped it win its majority mandate.

Ottawa’s no-strings funding formula for health care was pivotal in revealing how Mr. Harper views the federal-provincial relationship. He wants little to do with provincial areas of responsibility, whereas in its own area of jurisdiction, the federal government has moved aggressively.

Asked about provincial and territorial governments trying to stretch thin resources to house a prison population that will grow as a result of the Conservatives’ crime legislation, Mr. Harper – in Iqaluit to deliver $27-million for adult education in the North – made no apologies.

“We received a clear mandate to proceed with strengthening our criminal justice system to make sure those who commit serious crime do appropriate prison time,” he said. “We understand that obviously some of the administration of that is the responsibility of the provinces and territories, but we’re acting on a clear mandate of the people.”

Mr. Harper also sees Ottawa playing a more active role in promoting the economic union, by tearing down the walls of provincial interest that he believes hamper the growth of the economy.

This week’s B.C. budget included a corporate tax hike of 1 per cent, but not until 2014, and only if the fiscal outlook worsens.

British Columbia Finance Minister Kevin Falcon, whose government has brought in five successive cuts to the corporate tax rate, said he reluctantly sketched in the increase to ensure that the province can meet its target to return to a balanced budget next year.

“The days of markets tolerating government overspending are finished,” he said in his budget speech. “That’s the new paradigm.”

Meanwhile in Ontario, where an austerity budget is expected soon, the government has hinted that it may delay plans to cut its corporate rate further.

Ontario Premier Dalton McGuinty said this week that tax hikes are out of the question. But his government has not yet unveiled plans to cut program spending and erase the province’s deficit by fiscal 2018. A report by economist Don Drummond released last week made 362 recommendations to cut spending. Mr. McGuinty has not formally responded beyond saying he plans to keep his flagship all-day kindergarten program as well as a subsidy for hydro consumers.

International comparisons of Canada’s fiscal position often focus on debt and deficits at the federal level, which are relatively small compared to other G7 nations. But it’s at the provincial level where financial pressures are tighter largely due to rising health-care costs.

Finance Canada’s national accounts recorded the 2010 federal deficit as $42.6-billion, but when deficits at the provincial, territorial and local level are factored in, Canada’s total government deficit for 2010 was $90-billion.

With February winding down, Mr. Flaherty said there’s still no decision on when Ottawa will table its 2012 federal budget. He stressed that it will aim to curb the growth in spending and will not feature the kind of deep cuts that are taking place in Europe.

“This is not austerity. This is not draconian. It will be moderate in its approach,” he said of the next federal budget.

Mr. Flaherty said his next budget will plan to erase the deficit, but will also include a focus on the long term.

Heather Scoffield is a reporter with The Canadian Press. With a report from Justine Hunter in Victoria and Karen Howlett in Toronto